Italy's Eni buys Dominion Gulf of Mexico assets

LeiaParker

(Updates an item published at 1210 GMT, adding comments from Eni and Dominion CEOs and analysts, and details throughout.)

LONDON (MarketWatch) -- Eni SpA
E, -1.23%
Italy's biggest oil and natural gas company by volume, Monday said it has agreed to buy Dominion Resources Inc.'s
D, +1.10%
offshore production, development and exploration assets in the Gulf of Mexico for $4.8 billion.

The purchase will boost Eni's Gulf of Mexico production to more than 110,000 barrels of oil equivalent a day from 36,000 at present by the second half of 2007. It will increase Eni's 2P equity reserves by 222 million barrels of oil equivalent, the company said in a statement.

Eni, one of Europe's largest oil companies by market value, said the purchase includes exploration assets for $680 million. The transaction is subject to government approvals, and closing is expected on July 2.

The deal is in keeping with Eni's strategy of buying hydrocarbon reserves and production in key areas, where it can apply its deepwater-development skills and technologies, Eni Chief Executive Paolo Scaroni said in the statement.

Scaroni added that the move will give Eni "the necessary critical mass for its activities in the Gulf of Mexico."

The purchase follows recent acquisitions by Eni in Congo, Angola, Alaska and Russia.

Dominion, a Richmond, Va., energy company, had said in November that it would look to sell most of its exploration-and-production operations to focus on its core utilities business.

On Monday, Dominion said in a statement that it was still working to dispose of its western Canada and U.S. onshore exploration-and-production operations, with the exception of its low-risk holdings in the Appalachian Basin. The company said it plans to retain its Appalachian holdings to support its natural gas pipeline.

"Today's announcement is a significant step in Dominion's previously announced strategic plan to refocus on the power generation and energy distribution, transmission, storage and retail businesses," Dominion's Chief Executive Tom Farrell said in the statement.

In May, Farrell said the company was considering selling certain business units because of concerns that Dominion's stock was being undervalued. The exploration and production business had grown to become Dominion's most profitable unit, overshadowing the company's core utility and power-generation businesses.

The sale to Eni includes Dominion's deepwater assets in the continental shelf and in Texas and Louisiana state waters. It also includes the staff based in New Orleans.

Eni has operated exploration and development activities in the United States since 1966. It currently holds interests in 242 leases in the Gulf of Mexico and 151 leases in Alaska, the company said.

Eni is paying a similar price per barrel for Dominion's assets to the amount Norwegian energy company Norsk Hydro
NHY, +21.14%
paid in 2005 for similar assets through its acquisition of Spinnaker Exploration, Citigroup said in a research note.

"Strategically this acquisition makes good sense, enhancing Eni's presence in a major hydrocarbon basin, with upside potential, under a benign fiscal regime," Citigroup noted.

But Citigroup said the price paid appears generous. Eni's latest buy comes at potentially the top of the oil-price cycle and tops Citigroup's own estimated value of $3.9 billion on the assets, the bank said.

Citigroup added that the move reduces Eni's ability to make a more company-transforming buy, which the bank's analysts believe it should consider as its older producing assets decline.

Citigroup rates Eni a hold/medium risk with a target price of EUR24.50 a share.

KBC Securities analyst Antoine Leurent said that Eni's purchase of Dominion's Gulf of Mexico assets was needed as the company tries to meet its production-growth target.

"The price looks relatively high but obviously doesn't include the barrels that may be discovered later on in the exploration assets acquired," Leurent said.

The company's good track record on hydrocarbon discoveries had slipped recently, prompting it to look at acquisitions to further stimulate output growth, Leurent said.

KBC Securities rates Eni an accumulate with a target price of EUR24.

At 1445 GMT, Eni's shares were trading up EUR0.06 or 0.3% higher at EUR24.41 in a firmer Italian market.

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